2009, You Should Have Taken the Blue Pill
If something grows exponentially, all that really means is that the bigger it is, the faster it grows. You can understand how this is a process that could accelerate over time, and eventually get quite out of hand. Get bigger, grow faster, which makes you bigger, which makes you grow faster, which makes you bigger, and so on.
The thing about exponential growth patterns is that they can have a long period of what looks like stability, but that the growth cycle gets out of hand and there is a sudden unsustainable burst followed by, in most cases, a crash.
This initial long period of relative stability can create the illusion of sustainability. The example that made this clearest to me is the example of a water lily which doubles in size every day. Eventually, the lily will occupy the whole pond and smother it, killing all other life in the pond. But how much of the pond will the lily occupy just one day before the whole pond is covered? Only half. And the day before, only a quarter. The end will come suddenly, after a long period where it seemed everything would be all right.
Exponential growth can not be sustained and the only way out is to lower the rate of growth somehow.
Consider the following chart of global population over the last few hundred years.
Image from here
You can see the pattern of exponential growth, the line getting ever steeper and steeper as growth feeds size which feeds growth and so on. And keep in mind that on top of this growth in population, our economy is premised on exponential growth in wealth per person. So we have an exponential growth piled on top of an exponential growth.
Clearly, a continuation of this level of growth was not possible, and thankfully, reductions in global birth rates (especially in China) have ended this exponential growth pattern in enough of the world so that global population is levelling out and may even decline at some point in the next century.
However, global population has so far been able to rise to about 7 billion and counting, without being brought down by famine, pestilence or some other limiting factor. In order to understand if we can maintain this record, we need to understand what has allowed us to continue feeding (almost) everybody and advancing civilization, in the face of such huge numbers of people on a finite planet.
Some would say it is simply the expansion and application of human ingenuity, an infinite resource, and that we therefore have nothing to worry about, and could handle a global population of 20 billion or 50 billion or 100 billion.
Although I agree that human ingenuity is important, I offer two caveats (with a third implicit caveat being that there probably should be more caveats, I just haven't thought of them).
1) As much as ingenuity is important, if that ingenuity can’t come up with a replacement energy source for oil we have big problems. With enough energy you can solve almost any problem. Short on fresh water? Pipe it over mountain ranges, extract it from the oceans, build massive dams and reservoirs and irrigation systems. Short on food? Use natural gas to manufacture fertilizer, scour the earth for potash, irrigate the deserts. You get the picture. But without a big surplus of cheap energy, none of these methods for expanding nature's bounty are all that feasible.
Even all the efforts to reduce our dependence on oil (metal wind turbines shipped halfway around the world, massive concrete dams with 1000's of miles of transmission towers, etc.) depend on significant amount of cheap energy to build and maintain.
Will we inevitably find a better replacement for oil as supplies run low? Can we maintain a global population this large and the current Canadian lifestyle with dwindling supplies of easily accessed oil and gas? These are questions we don't have an answer for yet.
2) At a certain point, ingenuity is overwhelmed. Even the most optimistic cornucopian would admit that an earth which has one person per square foot of land wouldn't be a pleasant or sustainable place to live. The question is, is the current 8 billion and counting already past that point? Lately the global problems suggested we've overshot our carrying capacity seem to be piling up faster than we can solve them and few think that the world could sustain everybody living the way people in Canada currently do.
We’ve seen the problems from acid rain, we've had (and have ) the depletion of ozone in the atmosphere. The steady collapse of fisheries around the globe as we move further and further down the food chain. Dead zones in the sea due to agricultural runoff. Climate change(pdf) due to greenhouse gas emission. Deforestation. Loss of biodiversity. Acidification of the oceans. Etc.
Of course we will take action to try and mitigate these problems but each one will be a battle that will absorb resources, and many of them can only be partially mitigated, some hardly at all, and as long as we try to maintain global population and consumption at ever increasing levels, or even maintaining the current levels, these problems are just going to come harder and faster. At what point are we spending most of our resources just mitigating the negative effects of our existence, and few trying to improve it. At what point does even devoting all of our resources just trying to preserve the status quo prove inadequate? Are we past that point already? Again questions we don’t know the answer to.
So, 2009. The environmental problems will continue to harry us, but it’s still early days on that front (I hope!). After helping to blow up the global economy in 2008, oil prices and commodity prices are a big question mark for 2009. Absent some of that old human ingenuity, we currently seem stuck alternating between growth that drives up commodity prices because we don’t know how to get them cheaply any more or high commodity prices that kill growth because the inputs to everything get too expensive. I suspect that they will generally stay low for most of the year as the economic news gets grimmer and grimmer.
And on the financial front, while I predicted that financial problems would be the primary unpleasantness in 2008, even a pessimist like me underestimated just how bad things would be for the financial world last year. It will be more of the same in 2009, I suspect, namely trillions of dollars in government money given to banks to try and preserve the unpreservable status quo of a high leverage high debt economy.
There is no shortage of question marks surrounding the fate of the financial world in 2009, with seemingly plenty of smart people on both sides of every one. One of the questions I see asked most often is whether we will have deflation or inflation (likely deflation in 2009, followed by inflation at some point in the future). Another is will the U.S. dollar serve as a refuge as part of a flight to safety, or will people lose faith in the future value of U.S. dollars leading to a sudden, rapid plunge in the value of the U.S. dollar (beats me, either seems very possible - but sooner or later the bubble in U.S. debt will pop).
As for Canada, in 2008, the commodity boom that marked the end of the last debt fuelled boom, combined with the delayed collapse of our housing markets relative to the rest of the world helped cushion Canada from the economic troubles affecting the rest of the world. Now its 2009 and our housing market is falling and commodity prices are fallen and the last bits of Canadian smugness that suggest that, even if its not different this time, its different here will be wiped away by year's end.
Still in a world of 8 plus billion people, where resources of all kinds are likely to be in short supply, a place like Canada with a (relatively) sound financial system, a (relatively) stable political system, a placid population and a high ratio of useful stuff to people should be able to do better than most places over the medium haul. Sadly, doing better than most places in 2009 is likely to be a very low bar.
A friend who's been through a few recessions in his day suggested in a recent email that this might be a good time to 'keep your job, save some money for a pinch and ride out the impending hard times.'
Sounds like good advice to me.